Feed Prices Will Moderate—If It Rains

All signs, both here in the United States and globally, point to moderating corn and soybean meal prices this year. But there’s one big caveat—if it rains.

Chris Hurt, an ag economist with Purdue University, says global economic forces were already in place last year to moderate feed prices. But then much of the U.S. Corn Belt was stricken with drought. What should have been a 160-bushel national corn average shriveled to 122 bu/a.

"Eventually, we’ll have a normal crop," he says. "But we didn’t think we could have three sub-normal years in a row [but that’s what happened in 2010, 2011 and 2012]. Could we have a fourth year in a row?"

Hurt says the high run-up in corn prices the world has experienced follows a pattern of 10 years of high prices followed by 20 years of cost-of-production or lower prices dating back to World War I. Some kind of market shock, be it war or ethanol, drives world prices to unprecedented levels. But these high prices inevitably lead to greater supplies, driving prices back down.

The same cycle is happening now. The question is when—and if it rains. "Eventually, I’m going to be right," Hurt says.

Hurt spoke at the National Dairy Producers Conference in Indianapolis this week. He says the macro-drivers of more corn and soybean production are in place globally.

• Bio-fuel production and its consumption of corn are leveling off. High corn prices and moderate oil prices have squeezed ethanol production, with some plants shuttered this winter. Ethanol was consuming 5 billion bushels in 2010 and 2011. That dropped back to 4.6 in 2012, and it’s unlikely climb back to 5 billion bushels until later this decade.

• Rising incomes in China and developing countries appear to be leveling, reducing continued upward pressure of food demand.

• New investment in agriculture. When corn was $2/bu and under the cost of production, it made little sense for other countries to invest in agriculture when they could import it for less than could produce it. But $7 and $8/bu corn changed that dynamic, driving countries to re-invest in their own agriculture and into other potential exporting countries. "Now, a lot of dollars are being poured into Africa by the Saudis and the Chinese," says Hurt.

• New land is being brought into production. The old adage that you can’t make new land isn’t quite true. Since 2005, more than 100 million acres of land have been brought into production. North America has brought about 18 million acres into production from Conservation Reserve Program land and other acres that had not been in ag use. South America has brought 35 million acres into production; Asia, 36 million acres; Africa, 18 million acres; former Soviet Union countries, 6.8, and Oceania, 3.6 million acres. Only the European Union and the Middle East have reduced productive acres.

• There has also been whole-sale acreage substitution occurring, with more acres being devoted corn, soybeans, rice and energy-for-fuel crops such as rapeseed and sunflowers. Cotton, peanuts, sorghum, wheat and other less-value small grains have lost acreage as has hay.

• The world’s farmers have also intensified their use of technology to improve yields. Better seeds, fertilizers, irrigation and drainage have all increased the potential for higher yields world wide, says Hurt.

The futures market already reflects these new and shifting realities, says Hurt. Through 2016, corn futures average $5/bu. Soybeans average $12/bu and soybean meal averages about $360/ton.